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Ma Bell, remarried

November 02, 2005

AT&T IS DEAD. Long live AT&T.

AT&T, originally American Telephone & Telegraph Co., is one of the great brands of U.S. business -- and, recently at least, one of its great disappointments. Therein lies a tale that begins in a small laboratory in Boston and ends in an office tower in San Antonio.

SBC, the dominant telephone company in California and 12 other states, is expected to soon finalize its $16-billion purchase of AT&T, the erstwhile Ma Bell. And when it does, it will take more than just AT&T's assets -- it will assume its name, which still inspires a lot of confidence, especially among corporate customers. Still, the switch in names is rich in irony.

Until the early 1980s, AT&T was the sole choice for local phone service throughout much of the United States, as well as the provider of 90% of all long-distance service. But its brazen moves to block long-distance start-ups such as MCI and Sprint prompted the Justice Department to sue, leading to a court order that separated AT&T's long-distance business from its local phone operations in 1984.

The local phone lines were entrusted to Southwestern Bell (later renamed SBC) and six other "Baby Bells." At the time, AT&T was widely viewed as getting the better part of the deal. The long-distance business was taking off, or so went the conventional wisdom, and the local phone business had nowhere to go but down. Instead, competition turned long-distance service into a commodity, while the Internet created new opportunities in the local market. And AT&T, after having little success leasing the Bells' networks to compete in the local phone business, pursued a disastrous strategy of using cable TV systems to sell consumers a package of phone, video and Internet services. It lost billions of dollars and was forced to sell the cable systems to Comcast.

SBC and the other Bells continue to dominate the local markets -- unfairly, in the view of their competitors -- while gobbling up chunks of the long-distance business. That's why SBC, with $41 billion in revenue and $6 billion in profit last year, could take over AT&T, with $30 billion in revenue and $6 billion in losses. Some consumer advocates argued that the buyout would harm competition, but federal regulators approved it this week with minimal restrictions that expire within three years. Their decision was based on the hope that cable TV and wireless companies can do what AT&T could not: compete profitably with the Bells for local phone customers.

So SBC, based in San Antonio, will be taking over its former parent, which traces its roots to Alexander Graham Bell's experiments in Boston in the 1870s. The new AT&T won't be Ma Bell -- happily, most consumers have a wireless alternative for local and long-distance service, and gradually other options will appear as well. But even SBC loyalists have to admit that the AT&T name has a better ring.

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